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December 7, 2010

Put Uncle Sam on an Allowance

By Monty Pelerin
This country is headed for financial disaster. Spendthrift government is insolvent, and its behavior threatens the economy and lifestyle of all citizens.

The National Commission on Fiscal Responsibility and Reform recently provided recommendations for addressing government deficits. They proposed cuts that fell woefully short of a real solution. Even so, the committee was unable to reach an agreement.

This commission is just another in a long line of warnings and solutions regarding government insolvency. Previous commissions, agencies, and independent think-tanks have offered such advice for decades. Yet the problem only grows more critical. As described by the Wall Street Journal:

Debates over taxes and spending are at root about political philosophy: How big should government be? How much income should it redistribute, and to whom? We mention this to explain why today's report from President Obama's deficit commission is landing with such a predictable political thud.

The Problem

Everyone knows spending must be cut dramatically, except it does not and will not happen. Politicians, regardless of tribe, want to play Santa Claus, never The Grinch. As Thomas Sowell stated, "the first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."

Political behavior is not genetic. It is conditioned by voter-politician quid pro quo: "You give me something, and I will give you my vote." Conversely, austerity is penalized. Is there any surprise that government always grows and never shrinks?

This calculus is perverse because what is good for the politician is not good for the country. Politicians, like everyone else, are motivated by self-interest. As H.L. Mencken colorfully described them, "if a politician found he had cannibals among his constituents, he would promise them missionaries for dinner."

Political survival matters. Modern-day "statesmanship" provides no reward for political suicide. It is irrational for politicians to cut spending, and that is what ensures sovereign bankruptcy. Politicians will feign concern right up to the collapse of the economy. What then happens to our political system and country is unknowable, but likely ugly and dangerous.

The Founding Fathers established government as an agent of the people. They limited government's role to the protection of private property, allowing for internal and external defense and a court system to adjudicate disputes. The Constitution reflected their fears and codified their boundaries.

Two centuries later, government has escaped the cage that the Constitution represented. Today, the political class believe themselves masters, with the people as agents serving them.

The Solution

The reversed agency-principal relationship between the people and the government is the root cause of massive financial and social problems. Any "solution" that does not clearly reduce government to servant rather than master is merely a political charade. The Bowles-Simpson commission recommendations, while well-intentioned, are not a solution. They enable more can-kicking when we are out of time. If adopted, they will assure the eventual collapse of the country.

The Constitution, while emasculated, still provides the best means to regain control of the country. It offers a way to change the incentive structure for politicians, a means certainly preferable to the alternative -- revolution and anarchy.

Any plan must remove the incentive to ever increase spending. In effect, it must put the servant, government, on an allowance. Designed properly, such an amendment would alter the behavioral incentives of politicians without restricting their ability to govern the nation. It would ensure that their motivations were better-aligned with the country's.

There are multiple forms such an effort could take. At a minimum, any effective amendment should meet a set of requirements. It should:
  1. be designed outside of Washington.
  2. be definite, leaving no room for interpretation or compromise.
  3. contain automatic and substantial consequences.
One Possible Plan

The following is an outline of a plan that meets these general requirements. It is not presented as the best, but merely an illustration. Constitutional scholars or Tea Partiers can deal with the strategy and feasibility of obtaining such an amendment. To overcome the inevitable congressional resistance, two-thirds of the states could call a constitutional convention for the purpose of passing such an amendment.

Government spending would be capped as a percentage of GDP. Historically, federal spending has averaged between 18 and 19 percent of GDP for most years prior to the last two. While I would prefer something in the low teens or even single digits, any reasonable level would suffice. The target presumably would be phased in over a few years, allowing orderly adjustment to a lower spending level.

The following provisions seem appropriate:
  1. The spending target would be defined as percentage of GDP.
  2. An annual review by an independent public accounting firm would certify results. This accounting firm would be chosen randomly each year.
  3. The audit would certify both the validity of accounting standards and that the target was met.
  4. In the event that proper certification were obtained, government would operate as it always has.
  5. In the event that proper certification were not met, the following would occur:
    a. First year violation -- salaries for all elected congressional representatives would be halved until the next year's audit.
    b. Second year violation -- If the next year's audit also did not comply (i.e., two consecutive failures), all members of Congress whose salaries were reduced would be dismissed, and special elections would be held for their seats. Dismissed members would not be eligible to run until the next regular election.
  6. In the event that certification and target was met after a violation (one year failure and then remedy), all congressmen would be returned to their normal salary levels.
  7. No exception to this amendment would be allowed for any reason, including war, natural disaster, or depression.
These suggestions are not meant to be the answer. They are an answer!

The political class will howl at any such proposal (didn't the California pols when confronted with Prop 13?). However, they have proven their untrustworthiness and inability to manage spending. They must be put on an allowance like the rest of us. The alternative of continuing to believe their empty promises is too horrible to contemplate. The time to stop Lucy and her football trick is now, Charlie Brown. The stakes are too high to continue on this certain road to sovereign insolvency and economic collapse.

Politicians will have all of the discretion they have always had (although the states might want to stop the imposition of unfunded mandates and other trickery). Politicians would have to do their jobs within budgetary constraints like every employee, department, and family outside Washington, D.C. Exceeding budget would have consequences. Meeting budget would not guarantee reelection.

The important point is that the political motivation to always increase spending would be gone. Vote-buying could still occur, but within narrow limits.

There will be many objections to the plan, few of which will likely hold up to voter scrutiny. A few, with my reaction, are presented below:
  1. We spent what we budgeted, but GDP fell below expectations. Too bad. Next year, provide some provision in case that happens again. Your personally reduced income presumably will assist you in this matter.
  2. We had a natural disaster. Too bad. You didn't have to "rescue" the folks, or you could have cut funds from other areas of the budget to do so.
  3. We had a war. Too bad. Don't fund it unless it is so necessary that you are willing to be penalized by half your salary or going out and getting a real job. Good luck.
  4. I voted against all spending. Why should I get penalized? Too bad. How is that any different from good workers getting laid off in bad economies or from plant closings?
  5. It is not possible to manage a government this way. Too bad. We will find people who can. Businesses don't seem to have this problem.
Obviously there are other objections and ways to improve upon these initial musings. Please feel welcome to suggest some. Also, feel free to forward these ideas to the Tea Party and the state legislatures. Let's create some real excitement and save the country at the same time!
on "Put Uncle Sam on an Allowance"